Sri Lankan shares end 1 pct lower on move to tax capital gains

Reuters: Sri Lankan shares fell 1 percent on Thursday to hit their lowest closing level in more than seven weeks as concerns over a government decision to reintroduce capital gains tax kept investors on the sidelines.

Investor sentiment also took a hit on continued foreign fund outflows and rising interest rates, dealers said.

Sri Lanka's cabinet approved a proposal to reintroduce a capital gains tax on Wednesday, especially on land sales, with a cabinet spokesman saying no decision had been taken on whether the tax would apply to capital gains in the share market.

"Market is falling on low volumes with the high interest rates and the news of reintroduction of the capital gains tax," said Dimantha Mathew, head of research at First Capital Equities (Pvt) Ltd.

The benchmark Colombo stock index ended 1 percent, or 64.87 points lower, at 6,435.77, its lowest close since April 27.

Treasury bill yields rose between 1 and 4 basis points at a weekly auction on Wednesday. They have risen between 6 and 40 basis points since the central bank left key policy rates steady for on May 20.

The average prime lending rate edged up 24 basis points to 10.47 percent in the week ended June 10. Stockbrokers have said rising interest rates could be detrimental to risk assets if they jump beyond 12 percent.

Overseas funds offloaded a net 5.84 million rupees worth of equities on Thursday, extending the year to date net foreign outflow to 5.59 billion rupees worth shares.

Turnover stood at 325.6 million rupees ($2.25 million), well below this year's daily average of around 764.8 million rupees.

Shares in conglomerate John Keells Holdings Plc fell 1.94 percent, while the biggest listed lender Commercial Bank of Ceylon Plc lost 2 percent and Carson Cumberbatch Plc dropped 5.44 percent. 

($1 = 144.9000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

Sri Lanka GDP expands 5.5-pct in first quarter 2016

(LBO) – Sri Lanka’s economy expanded 5.5 percent in the first quarter of 2016 from a year earlier, led by industry and services, the state statistics office said.

In the first quarter of 2016, gross domestic product reached up to 2,088,024 million rupees against 1,978,609 million rupees recorded first quarter of 2015.

Agriculture, industry, services and taxes less subsidies on products has contributed to GDP by 7.4 percent, 31.6 percent, 52.4 percent and 8.5 percent respectively in the quarter.

Growth rate of the agricultural activities however have shown only a slight increase of 1.9 percent.

Among the sub activities, growing of vegetables showed a high growth rate of 16.3 percent while growing of oleaginous fruits reported 10.0 percent growth.

Contribution from tea decreased by 11.6 percent during the quarter while rubber and marine fishing suffered slight falls in the growth rates by 2.6 percent in each activity.

Industrial and services activities have recorded a significant increase with 8.3 percent and 4.9 percent, when compared to the same period last year.

Construction has increased significantly by 12.0 percent during the quarter with respect to the first quarter of 2015.

Rubber and plastic products have shown a considerable growth rate of 7.0 percent while food, beverages and tobacco showed 1.2 percent growth.

Textile and wearing apparel have shown a 1.9 percent growth respectively, during the first quarter of 2016.

The services sector recorded a significant growth rate of 4.9 percent during the first quarter of 2016, when compared to the same quarter in the year 2015.

Among the sub activities of services, financial service activities have shown significantly higher growth rate of 15.9 percent while wholesale and retail trade recorded 5.7 percent growth.

Sri Lanka promises to reform Airline, public sector, fuel pricing to IMF

(LBO) – Sri Lanka has committed to reforming government finances and the public sector, in its letter of intent to the International Monetary Fund.

Structural benchmarks include a “resolution strategy” for SriLankan Airlines by September 2016, in which it will take the loss-making airline off its books.

Other reforms include enhancing oversight and discipline of the six largest state-owned enterprises, and implementing automatic fuel and electricity pricing by end of this year.

Sri Lanka’s foreign reserves have fallen sharply due to an outflow of capital, partly due to lack of confidence in the government’s fiscal consolidation and reform plans. The IMF said the support programme intends to address these issues.

As part of the 1.5 billion dollar 3-year arrangement, the government intends to record the fiscal cost of non-commercial obligations and subsidies for SOEs in the central government budget, starting in 2017.

According to the Letter of Intent published on the IMF website, the Ministry of Finance (MOF) is expected to introduce automatic fuel pricing mechanism that ensures retail prices are above cost-recovery levels, by December 2016.

Automatic electricity pricing will ensure retail prices are above cost-recovery levels, with implementation due this year.

In terms of debt obligations, the government has already committed to creating a comprehensive database of financial obligations of state-owned enterprises, including a breakdown of arrears and non-arrears to be certified by the Auditor General. A registry of such obligations will be created, the letter states.

The list of commitments by the government are below.

Structural Benchmarks and timeline
Fiscal Policy Management
Submit to Parliament the 2017 budget in line with the program targets. November 2016
Submit to Parliament the 2018 budget in line with the program targets. November 2017
Submit to Parliament the 2019 budget in line with the program targets. November 2018

Tax Policy Reform
Publish a tax expenditure statement as part of the official government budget. December 2016

Approve by cabinet a time-bound strategy (agreed with IMF staff) to reduce or eliminate tax expenditures. December 2016

Submit to Parliament a new Inland Revenue Act with a view to simplifying and broadbasing the income tax. March 2017

Complete by Ministry of Finance (MOF) a diagnostic review of the VAT system. June 2017

Tax Administration Reform
Adopt by MOF Inland Revenue Department Key Performance Indicators on the number of risk-based VAT audit. September 2016

Adopt by MOF Inland Revenue Department a VAT compliance strategy that includes a time-bound plan to implement risk-based audit. September 2016

Fully roll out by MOF Inland Revenue Department new IT systems (RAMIS) for major domestic taxes (including income tax and VAT), including web-based tax filings for income tax and VAT. December 2016

Adopt by MOF Inland Revenue Department compliance strategies for corporate and personal income taxes. June 2017

Public Financial Management
Establish by MOF a commitment record system (with quarterly reports produced no later than one month after the end of each quarter) and quarterly expenditure commitment ceilings for the 2016 budget and the 2017 budget. July 2016

MOF to roll out ITMIS with an automated commitment control module for Ministry of Finance. December 2016

MOF to roll out ITMIS with an automated commitment control module for Ministry of Health. April 2017

State Enterprise Reform
Cabinet to approve a resolution strategy for Sri Lankan Airlines. September 2016

Record the fiscal cost of non-commercial obligations (including subsidies) for SOEs in the central government budget, starting in 2017. November 2016

MOF, line ministries, and SOEs to sign and publish Statements of Corporate Intent for the six largest SOEs (Ceylon Petroleum Corporation, Ceylon Electricity Board, Sri Lankan Airlines, National Water Supply and Drainage Board, Airport and Aviation Services Limited, and Sri Lanka Ports Authorities).
December 2016

MOF to introduce automatic fuel pricing mechanism that ensures retail prices above cost-recovery levels and a financial position of Ceylon Petroleum Corporation capable of covering debt service.
December 2016

Cabinet to introduce automatic electricity pricing mechanisms that ensure retail prices above cost-recovery levels and a financial position of Ceylon Electricity Board capable of covering debt service. December 2016

Prior Actions
Cabinet to issue a Memorandum requiring the Ministry of Finance to complete by end-October 2016 a time-bound strategy to address the issue of outstanding arrears of the central government and obligations of state enterprises. The Memorandum will specify that the strategy include: (i) completion (by end-2016) of a comprehensive database of SOE’s financial obligations, including a breakdown of arrears and non-arrears to be certified by the Auditor General, for use in creating a registry of such obligations; (ii) clarification of the government’s responsibility over existing obligations related to subsidies and other non-commercial obligations of the SOEs.
Prior action -Met

Ministry of Finance to issue circulars to (i) formally implement tax policy and other revenue measures outlined in the Cabinet Memorandum of March 4, 2016; (ii) detail revised expenditure ceilings for government ministries and agencies consistent with the overall budget deficit target for 2016.
Prior action -Met

Cabinet to issue a resolution to adopt a framework note (agreed with IMF staff) for a new Inland Revenue Act, which embodies key tax policy drivers, overarching legal design framework, and the tax law reform roadmap as outlined in the March 2016 IMF Legal Department technical assistance mission Aide Memoire.
Prior action -Met

Formally suspend by Cabinet order the Board of Investment’s capacity to grant tax exemptions, tax holidays, and special tax rates until such time as the BOI Act can be formally amended.
Prior action -Met

Sri Lanka cabinet approves reintroduction of capital gains tax

(LBO) – The cabinet committee on economic management has agreed to reintroduce the capital gains tax (CGT) to rectify the increase in the inequality of income distribution, a cabinet proposal said.

“The cabinet also approved to draft a new capital gains tax regime,” it said.

During the last few decades there has been a massive increase in the private capital in the country.

The increase in prices of land attributable to the large infrastructure development carries out through government funds have enabled the land owners to make significant capital gains free of taxation.

The proposal said this situation resulted in the increase in the inequality of income distribution.

Cabinet proposal further said the former CGT regime is outdated and no longer reflective of international good practice.

The cabinet committee has advised not to simply reintroduce the former CGT regime and to draft a new CGT Regime with the technical assistance from the IMF.

The latest staff report of the IMF also said that income from capital can be taxed at a low flat rate and collected at source.

CGT previously operated in Sri Lanka until 2002. Under that regime, capital gains were made liable to income tax by the Inland Revenue Act.

The maximum rate of tax for capital gains was set at 45 percent, until it subsequently reduced to 25 percent in 1978, and finally abolished in 2002.

Sri Lanka’s NBT should be abolished, minimal exemptions for VAT: IMF

(LBO) – International Monetary Fund’s latest staff report has suggested that Sri Lanka should minimize the exemptions provided under the Value Added Tax system, while abolishing the Nation Building Tax.

The report has highlighted that the country needs an appropriate registration threshold and the degree of base erosion should be reviewed.

Sri Lanka, through recent measures, exempted excisable goods such as petroleum products, cars, tobacco, and alcohol and replaced them with increases in excise rates.

The IMF has also suggested that Sri Lanka should abolish the Nation Building Tax as levying excises on a few key items at appropriate rates can support revenue needs while addressing externalities.

Commenting about direct taxes the fund has suggested introducing a simple and broad-based corporate income tax regime that would preserve revenue collection while facilitating competitive statutory rates.

“Corporate tax incentives should be limited to those linked to strategic investment,” IMF staff report said.

“The personal income tax regime should treat individuals equally regardless of occupation, with a tax rate scale appropriately set to alleviate income inequality.”

The International Monetary Fund also said that Income from capital can be taxed at a low flat rate and collected at source.

In Sri Lanka, numerous tax expenditures have been granted against tax principles, including corporate tax holidays, low tax rates for professionals, and exemptions for debt securities issued by listed companies.

The fund says estimated revenue foregone due to corporate profit exemptions was in the range of 1 1/3 percent of GDP in 2012–13, roughly equal to corporate tax collections.

Strengthening property taxes, streamlining import tariffs and para-tariffs, and establishing simple and coherent regimes for taxing SMEs were among areas highlighted by the latest staff report.

Marangoni to set up Sri Lanka tire plant for export

ECONOMYNEXT – Marangoni, an Italy-based tyre manufacturer, is to set up a radial and industrial tire manufacturing plant in Sri Lanka with a total estimated investment of $75 million, government spokesman Media Minister Gayantha Karunatilleke said.

Sri Lanka’s Cabinet of Ministers has approved a proposal by Malik Samarawickrama, Minister of Development Strategies and International Trade, to allocate about 100 acres in Gonapola, Horana, 5km from the southern expressway, he told a news conference.

The tyre factory will have a capacity of 3 million tyres per annum, with 75 percent of production to be exported and the rest sold in the local market, according to the proposal.

The Board of Investment is to grant concessions subject to the plant exporting a minimum of 80 percent of production.

They concessions are Customs duty exemption on capital goods and raw material imports and exchange control exemptions.

Guangzhou firms scout for investments in Sri Lanka

ECONOMYNEXT – Executives from companies in Guangzhou, the capital of south China’s Guangdong province, are visiting Sri Lanka looking to invest in the island, the Board of Investment said.

Chinese companies expressed interest in internet shopping in Sri Lanka, manufacture of Vinyl Products, electronics, home appliances and logistics telecommunications services, it said in a statement.

Executives from Chinese enterprises met with Sri Lankan enterprises after at a business forum with the purpose of entering into joint ventures.

Xiao Zhenyu, Director-General of Guangzhou Municipal Commission of Commerce, told the forum Chinese firms want to do not only trading but invest as well.

“Twenty years ago Guangzhou was experiencing the same environment like Sri Lanka,” he said.

“The economic development of Guangzhou is considerable. The GDP of Guangzhou is US$ 350 billion, higher than that of many countries. Per capita income is US$ 20,000.”

Guangzhou businessmen have the capacity to invest abroad and have already moved to Malaysia and Singapore, he said.

Sri Lanka to borrow $350mn from Türk Exim Bank

ECONOMYNEXT – Türk Exim Bank will give a $350 million loan to the Sri Lankan government under a deal to be signed between Sri Lanka and Turkey to enhance relations through financial cooperation, Foreign Minister Mangala Samaraweera said.

The announcement was made after talks with visiting Turkish Foreign Affairs Minister Mevlüt Çavuşoğlu.

“Economic and technical cooperation between the two countries have been strengthened by the signing of the Agreement on Economic and Technical Cooperation, which came into effect in 2007,” Samaraweera said in a statement.

“We will soon hold the second meeting of the Sri Lanka-Turkey Joint Committee on Economic and Technical Cooperation.”

Çavuşoğlu said President Recep Tayyip Erdoğan of the Republic of Turkey would pay a state visit to Sri Lanka this year.

Sri Lanka T-bill yields rise across the board

ECONOMYNEXT – Si Lankan Treasury Bill yields rose across the board at Wednesday’s auction with the 1-year Bill yield edging up one basis point to 10.54 percent, the public debt department said.

It got bids worth Rs20 billion for the 1-year Bills and accepted bids worth almost Rs6 billion, the public debt department, a unit of the Central Bank, said.

The 3-month T-bill yield rose 02 basis points to 8.84 percent and the 6-month T-bill rose 04 basis points to 9.80 percent.

The public debt department got total bids of Rs64 billion and accepted Rs18.3 billion worth of T-bills.